In spite of all of the difficult news today, there is at least one positive development, however minor in comparison to the world situation. At the time of this writing, interest rates are lower than they have been in a generation. Homeowners and other property owners would be wise to calculate the potential benefit of obtaining a mortgage or refinancing an existing mortgage.
If you require mortgage financing, including refinancing an existing mortgage, the first step is to contact a lender to determine how much money you may be able to borrow and what to expect in terms of costs involved in obtaining the mortgage loan, the monthly payments and interest rate. We are advised by lenders that such loans are currently available even under the present health and economic situation, assuming all parties involved utilize remote procedures that are compliant with CDC recommendations.
Upon determining that an acceptable loan is available, the next big questions are: Can I afford to make payment which the loan will require or, in the case of refinancing, how long will it take for the new monthly payment to yield enough savings to make up for the closing costs of a new loan? When making these calculations, keep in mind that the result you come up with is only as good as the numbers you plug in. For this reason, it is essential that you identify all closing costs before getting involved in mortgaging your property or refinancing an existing mortgage.
In beginning the process, we suggest using local lenders if it all possible. Many of our out-of-state buyers are quite surprised at how easy it is to work with local banks, especially after dealing with national lenders. Local lenders know our towns, our market and our local real estate procedures, can act quickly and can act in a personalized manner. We have found their rates and fees to be comparable to those of national lenders. Their document requirements are almost always simpler. Most local lenders are flexible and accommodating as to scheduling, which can be valuable. As real estate attorneys, we particularly appreciate the fact that we can call a local lender and get quick answers to any question that our client or we may have.
Within three days after submission of an application for a loan, a lender must provide the borrower with an estimate of all closing fees, including pre-paid and escrow items and lender charges. The estimate is designed to give borrowers the ability to shop and compare the costs of one loan to the costs of another, so that they can make informed decisions based on the total cost of the loan to them.
If a lender agrees to provide a loan applicant with a mortgage, the lender will issue a “loan commitment” after reviewing a prospective borrower’s financial ability, credit history, and the value of the property to be mortgaged. The fact that a commitment has been issued does not, in and of itself, mean that the lender will be making a loan. More often than not, a loan commitment contains conditions. Those conditions may be subjective, such as requiring a “satisfactory” appraisal, submission of proof of the borrower’s source of funds for the purchase satisfactory to lender, and similar requirements. Some other conditions are objective, such as requiring copies of bank statements or pay stubs, which are often easily obtained.
For some homeowners who have no mortgage or who wish to retain their current mortgage and who may not want to receive the proceeds of a mortgage unless needed, it may be more advantageous to borrow money against the equity in their home, rather than to refinance their current mortgage. This is what is called a home equity line of credit (HELOC), which is also secured by a mortgage on a home. In most cases, HELOCs allow a homeowner to borrow up to a certain fixed amount of money from the lender during what is called the “borrowing period”. During the borrowing period, the homeowner is only required to pay interest on the outstanding principal balance of the loan, may pay off all or a portion of any principal borrowed at any time but does not have to repay the principal. Once the borrowing period is over (usually 10 years), the homeowner must make equal monthly payments sufficient to amortize the outstanding principal balance of the loan plus interest over a predetermined period, which is also usually ten years. Typically, the interest rate on a HELOC is adjustable. Current rates are very low, although it is difficult to predict how those rates will change in the future, in this uncertain environment. Because lenders frequently pay for the costs of recording a HELOC, and often the homeowner’s attorney’s fees and document preparation charges, many HELOCs charge a penalty fee if the loan is repaid within a certain time period.
A question to consider when considering financing or re-financing is whether to apply for an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. Fixed-rate loans are perfect for borrowers who want predictability of payment amounts, as their interest and the amount of their payment will never adjust upward or downward during the life of the loan. An ARM is for the borrower who takes a shorter view and is willing to risk a higher rate and higher payment in the future in exchange for a lower rate in the present. The adjustable-rate mortgage may be best for those who do not anticipate keeping their home for an extended period of time or who anticipate paying off their mortgage in the near future. There are other types of mortgages, of course, but these two types are the most typical.
Under normal circumstances, closings take place at a lawyer’s or lender’s office. In the current environment, we and other lawyers are conducting closings our offices with the least personal contact possible, at all times maintaining social distancing between clients and staff. We record the transactions electronically.
